--Since March this year, there has been a spate of bank failures in the US. IT and other start-ups have been heavily affected by this.
Since 2023, a number of US financial institutions have failed: in March, Silicon Valley Bank (SVB), which deals with IT start-ups; Silvergate Bank and Signature Bank, whose main customers are crypto-asset-related companies; and in May, California-based First Republic Bank ( FRC), which is based in California.
The financial turmoil has also spread to Europe, with Switzerland's Credit Suisse (CS) also hit by the crisis in March. The country's central bank announced a 50 billion franc injection into CS, and the situation was calmed down when the country's top bank, UBS Bank, took over CS.
SVB and Signature Bank were the biggest failures, and FRC was the second largest US bank failure in history, surpassing SVB. Subsequently, the US financial authorities announced that SVB's deposits would be fully protected in order to limit the impact on the financial system as a whole, while for FRC, it was announced that its deposits and assets would be acquired by JP Morgan Chase, a major bank. A total of 84 branches in eight states in the US have resumed operations as the bank's branches.
The series of failures was triggered by repeated policy rate hikes by the Federal Reserve System (FRB), the US central bank. The country's bold monetary easing after the Corona disaster triggered inflation, with the consumer price index recording more than 7% for about a year from December 2021 onwards. This had a major impact on people's lives.
In order to curb excessive investment and consumption, interest rates were raised a total of nine times between March 2010 and May this year, which led to higher interest rates on government bonds and further withdrawals of funds by customers. The three banks that failed in March had IT start-ups and crypto-asset-related companies as their main customers.
After the Corona disaster, the easing of monetary policy allowed funds to flow into these growth sectors, but higher interest rates not only made it more difficult for IT start-ups to borrow, but also increased the risk of interest-bearing debt repayments.
Share prices also slumped, making it less easy to raise funds from the market through IPOs (initial public offerings), for example, as SVBs were unable to withstand bad debts and cash withdrawals by cash-strapped clients.
With regard to crypto assets, it is obvious that if interest rates on US Treasuries rise as a result of higher interest rates, many investors will turn their money towards safer alternatives. The increase in the number of people selling crypto-assets has led to a downturn in the performance of the companies operating the exchanges, which in turn has affected the two banks that finance them.
Above all, the current situation is a major headwind for start-ups. Until now, they have been able to maintain their growth by taking out loans on the back of low interest rates, but their fragile financial base is unlikely to hold up under high interest rates.
On the other hand, the current situation is also negative for VCs who have invested in start-ups. They, too, have relied on loans from financial institutions to fund their investments, and high interest rates and financial instability are discouraging them from investing.
The US has led the world economy in IT, including producing GAFAM, but what will happen now? These companies have also announced layoffs and the future is in doubt. It is sincerely hoped that the financial crisis originating in the US will not spread further around the world.
